Back in June, we reviewed the "2017 J.P. Morgan Global Liquidity Investment PeerView" survey, which interviewed almost 400 global CIO and treasurers about their cash investment preferences. (See our June 6 News, "JPMAM Investment PeerView Survey Says Money Funds Gain on Deposits.") After another read, however, we realized that we'd missed a number of important points. Also, given that the survey addresses a number of topics involving European money market funds and corporate investors (and we'll be in Paris early next week hosting our European Money Fund Symposium), we thought it would be timely to quote some more of the work.
The Peerview report tells us, "Stable NAV money market funds continue to be the most permissible investment, followed by bank obligations, U.S. Treasuries, floating NAV MMFs, commercial paper and U.S. government agency securities. Insurance companies tend to allow more investments to be permissible compared with other industries. The vast majority of respondents prefer rated money market funds over non-rated funds, which are permitted by only 6% of survey participants' investment policies."
It explains, "With an increase across all three regions, one in five respondents globally permit the usage of ultra-short/short-term bond funds, up 54% from 2015. Over 10% of respondents' policies allow for exchange traded funds (ETFs). Permissibility is most often reported by asset managers (36%) and insurers (48%). Among Asia Pacific participants, most of whom are China-based, the percentage of firms permitting wealth management products has fallen significantly, from 40% in 2015 to 18% in 2017. Firms with larger cash balances tend to have more flexibility in allowing riskier securities to be permissible. Nearly one-third of firms with USD 5 billion-plus in cash permit asset-backed securities, and almost one-quarter allow mortgage-backed securities."
J.P. Morgan A.M. writes, "In an evolving regulatory environment, nearly half (46%) of respondents plan to change their investment policy in the next six to 12 months. That is up from 38% in 2015.... More than half of all Europe participants intend to change their investment policies, the highest percentage among all regions, most likely driven by upcoming MMF reform. Only 33% of Asia Pacific participants plan to change their investment policies, which could be reflective of attractive USD bank deposit rates and fewer regulatory pressures in the region in comparison with Europe and the Americas."
They continue, "In terms of investment type, intended policy changes are focused on adding stable and floating NAV MMF and ultra-short/short-term bond funds. Asia Pacific firms are significantly more likely to intend to make changes to stable NAV money market funds, non-rated money market funds, exchange traded funds, bank obligations and high yield bonds compared with companies in Europe and the Americas."
The survey explains, "In Asia Pacific, firms have traditionally used bank deposits. Notably, though, Asia Pacific firms intend to add stable NAV money market funds (53%), bank obligations (24%) and traditional repo (16%) at a higher rate than their Americas and Europe counterparts. This could be a sign of the developments in the China market. Globally the survey showed a modest increase in the number of firms that intend to add commercial paper, asset-backed securities, traditional/non-traditional repo and corporate debt, suggesting a slight increase in appetite for moderately riskier assets."
It says, "With a 44% allocation to MMFs in 2017 vs. 30% in 2015, liquidity investors demonstrate a continued and substantial commitment to both stable NAV and floating NAV MMFs. The share of cash allocated to bank obligations has fallen significantly, from 47% in 2015 to 27% in 2017. Respondents reported a larger allocation to MMFs than to bank obligations (44% vs. 27%), which likely reflects at least in part a move by banks to drive non-operating deposits off balance sheet to comply with Basel III regulations. The survey showed a 50% global increase in floating NAV allocation since 2015, with a 200% increase among Americas respondents, as new SEC rules require institutional prime and municipal MMFs to float their NAV."
JPMAM's report states, "Firms with less than USD 500 million in cash have over half (53%) of their cash invested in money market funds. Peers with assets of USD 5 billion or more have more diversified allocations.... Overall, most firms plan to stay the course with their allocations based on next year's market outlook, although they are making changes at the margin.... Looking to capitalize on the current yield opportunity and anticipating what is likely to be an environment of slowly rising rates, respondents reported a net increase in expected allocations to stable NAV, floating NAV and ultra-short/short-term bond funds. The survey finds that many participants have already amended their investment policies to permit FNAV funds, and many also intend to increase their allocation to FNAV funds."
They comment, "Our results have identified fairly consistent trends over the last few years -- a steady increase in the use of MMFs and ultra-short/short-duration bond funds and a decline in the percentage of firms decreasing their use of bank obligations (from 22% in 2015 to 12% in 2017). This suggests that much of the Basel III-induced movement of cash may have already occurred.... If bank deposit rates lag other money market investments, money market funds are by far the most popular choice for moving cash, selected by nearly two-thirds of respondents. That feedback is consistent across all regions, cash balances and industry types."
On the new types of European money funds, JPMAM writes, "There is no clear preference among the four structures for short-term money market fund investments, but more than a third of investors said they need more time and/or information before making a decision (particularly European respondents–44%).... Examining the four structures, European respondents are significantly more likely than their Americas or Asia Pacific peers to prefer a prime/credit-style low volatility NAV money market fund with liquidity-based fee/gating provisions. Among Americas survey participants, the most popular choice (25%) was a government MMF."
They tells us, "Among survey participants who are considering these four new money market fund structures, 43% ranked risk of a liquidity fee/gate as the most important factor in their decision-making. The percentages were highest for asset managers (68%) and insurers (61%).... Only 37% of U.S.-based investors are currently invested in a prime money market fund, down from 63% in 2015. A majority (61%) transitioned assets from a prime MMF to a government MMF because of the SEC Rule 2a-7 changes that went into effect in October 2016."
The Peerview survey explains, "When those U.S.-based investors who transitioned assets from a prime MMF (floating NAV, fees/gates) to a government MMF (stable NAV, no fees/gates) were asked to rank the importance of factors that would impact their decision to move assets back into prime funds, 50% cited comfort level with FNAV and gates/fees as the most important consideration. When U.S.-based investors were asked how much excess yield a prime MMF would have to pay before they would consider investing in one, 36% of participants in the 2017 survey said that yield would not be a factor in their decision-making. That is down significantly from 2015, when over 54% said excess yield would not be a factor. Nearly half of respondents would find an excess yield of between 15 basis points (bps) and 50bps to be a compelling factor."
It adds, "Since our last survey was conducted, in 2015, most respondents have not revised their investment policies in order to mitigate the impact of negative interest rates on euro and/or sterling-denominated investments. However, there were some changes of note: 35% of European respondents, and 30% of companies with USD 5 billion-plus in cash assets, changed their policies to allow increased credit risk. The survey reports significant increases overall in credit risk, interest rate risk and the use of currency swaps since 2015."
Finally, they write, "General corporate purposes ranked as the top factor influencing a decision to repatriate assets, by both region and cash balance. Among companies with a cash balance of less than USD 500 million, 39% cited general corporate purposes as the most important factor, the same percentage as the other three factors combined.... We could see money in motion in the coming quarters and years. Employment of repatriated assets was fairly evenly split among the primary choices for repatriated assets (keep in cash, eliminate or pay down debt, capital expenditures, M&A investment, pay dividend and/or repurchase stock), both regionally and by cash balance."
